Wednesday 29 July 2009 09.23 EDT
First published on Wednesday 29 July 2009 09.23 EDT

Microsoft and Yahoo have confirmed a 10-year global search advertising deal forecast to generate income of $500m (£305m) a year.

The deal gives Microsoft backing for its recently relaunched Bing search engine, and it gives Yahoo much-needed cost savings and income during the recession. Yahoo estimates the agreement will boost its operating income by $500m and cut capital operating costs by $200m.

Before the deal was announced, it was reported that Yahoo had wanted an upfront payment of billions of dollars. Instead, Microsoft agreed to a revenue-sharing arrangement.

Microsoft will pay "traffic acquisition costs" amounting to 88% of search revenue generated on sites owned or operated by Yahoo over the deal's first five years.

It will also guarantee a minimum "revenue per search" on Yahoo sites for the first 18 months after the service is launched in any given country.

Microsoft will handle the search technology, while Yahoo will provide the search-advertising sales force.

Although Microsoft will license Yahoo's search technologies, its own recently launched Bing service will be "the exclusive algorithmic search and paid search platform for Yahoo sites".

Alongside the work of Yahoo's sales teams, Microsoft's AdCenter platform will handle self-service advertising sales. The deal only covers search advertising, and the two companies will retain separate display advertising businesses.

To allay privacy fears, Yahoo and Microsoft are promising to share no more data than is necessary to "operate and improve the combined search platform".

Firing a shot at search giant Google, they said the deal would give advertisers another choice, freeing them from the need "to rely on one company that dominates more than 70 percent of all search".

Google still dominates search in many markets, and Microsoft hopes that the deal will give it and Yahoo the scale to compete, according to its chief executive, Steve Ballmer.

"Through this agreement with Yahoo, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company," Ballmer said.

The deal will be seen as a significant victory for Yahoo's new chief executive, Carol Bartz. She was hired in January, when the company's co-founder, Jerry Yang, stepped down after rejecting a buyout offer from Microsoft.

The deal will still have to be approved by regulators. But while some analysts have said that Google could cry foul, its own market position makes it a more likely target for regulators' suspicions than this partnership.

Barring any regulatory hurdles, the Yahoo and Microsoft expect to close the deal in early 2010.

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All the money Yahoo ever spent on refining its search product - which still led Microsoft for market share - has just been flushed down the toilet. What does Yahoo get in return? Nothing tangible. Microsoft, by contrast, does